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KiwiBuild is becoming a political embarrassment for this Government. That is unfortunate because at least this Government acknowledges housing affordability is a crucial issue in this country. But KiwiBuild is a solution that likely fails to answer the crucial question. Is it demand or supply that has created the housing affordability issue?

We are a village. I am reminded of this each time I visit Australia. Australia is a town by world standards. A highlight for me when visiting Seedny is doing the bookshops. I love browsing their economics sections.

Aussie economic commentators have written heaps about what has happened in their country over the past 30 years. It is a goldmine of thinking relevant to what has happened here.

It interested me to read about the role of banks, financial deregulation and the housing market in Australia. Australian banks have been mercenary in their lending practices. They have had a huge preference for lending on residential property. They are much less enthusiastic about lending to small businesses which create jobs and incomes for people who live in houses.

Yet the biggest insight is the influence of the housing market on the wider economy and the appreciation of what has driven this market over the past few decades.

KiwiBuild is based on the assumption that a lack of housing supply has created the housing affordability crisis. So the solution is simple. We need to build more houses. We have swallowed this mantra hook, line and sinker. With little evidence to support it.

Here's a challenge to the supply side argument. If the lack of supply is what is driving house prices why has the price of houses in places such as Dunedin, Northland, Nelson and Hawke's Bay taken off in recent years? These areas have experienced little population growth or average income growth. There should be no supply issue.

The likely answer is that house price growth in these areas is being driven by investment demand due to ultra low interest rates and unattractive yields on housing in major cities. This has been called the halo effect.

This begs the question. What has driven house price inflation in major centres? Has it been foreign buyers, ultra low interest rates and aggressive bank lending or genuine supply constraints?

We need to be very careful in how we interpret what is going on in our housing market. Most pundits who comment in the media have a vested interest. They are either bank economists or have ties to the real estate industry. Studies that purport to show population growth compared to future housing supply often contain unrealistic assumptions. They assume record migration levels will continue. They often ignore the growth in construction of student accommodation and aged-care facilities. They ignore the demographic of an ageing society. They ignore the potential increase in people per household.

The Australian housing market is now in sharp decline, particularly in major centres. As house prices fall, banks become more reluctant to lend. Their collateral is declining and they fear bad debts. This becomes self fulfilling in its effect on house prices.

Mortgage lending in Australia has fallen by 18 per cent in the past year. It exposes the role of banks and their lending practices in driving the housing market. Of course, things are different here ... yeah right.

We need good data. Good data is crucial to good policy. Finding out exactly who is buying houses and using real time data to monitor the market is crucial.

Peter Lyons teaches economics at Saint Peter's College in Epsom and has written several economics texts.